Pain or gain? Flipkart#39;s ESOP saga may leave former employees with a raw deal

May 16
18:56 2018

Flipkart employees will now be able to liquidate their vested employee stock ownership plans (ESOPs), after the proposed acquisition by US-based retail giant Walmart.

The Walmart deal valued Flipkart at USD 20.8 billion, and as per a Moneycontrol report last week, Flipkart employees may gain USD 500 million from selling their ESOPs in the deal.

However, there is a caveat. While existing employees have the option to liquidate 100 percent of their vested options over a period of two years, former employees can liquidate only 30 percent. What happens to the balance 70 percent is still unclear.

Experts say this is based on the American concept, “present to win,” which aims to reward employees in active service at the time of an event, such as the sale of the business in this case.

“A few companies in the US punish employees for not being around with the company till the time such an event happens. So while the existing employees get to enjoy larger benefits, the same is limited for the former employees,” said a corporate lawyer requesting anonymity.

Also, older employees are likely to have received ESOPs at much lower valuations compared to recent employees who might see limited appreciation in the value of their ESOPs.

“It is possible that what I am making by liquidating 100 percent is way lower as compared to the value of 30 percent of a former employee’s ESOPs,” said an existing employee of Flipkart.

ESOPs are benefit plans that are offered to employees in the form of stocks in a company. Employees can liquidate their ESOPs when the company goes for a buyback event. Usually, it happens either when a company raises a funding round when it goes for an initial public offering or in cases like these when it gets acquired.

Flipkart informed its ESOP holders that liquidation will be done at USD 125-129 per option.

This is the second time in the last 12 months that Flipkart has given its ex-employees the option to encash ESOPs. The last one was at USD 85-88 per option.

One of the former employees is rather pleased by Flipkart’s decision to allow them to liquidate only 30 percent of the vested options.

“It is completely fine. In my mind clearly, no one wants to liquidate everything right now. People would want to hold a part of it to see how things progress from here,” he said adding, he was optimistic that the valuation will rise further in the days to come and by the time the company is ready for an initial public offering, it is likely that his options will be priced much better.

But it may not be so simple. In a filing with the US regulator, Walmart said it could take Flipkart public within four years. But sources suggest an IPO in the near term is unlikely considering the amount of investment Walmart plans to make in the e-tailer.

The other option for former employees to liquidate the balance 70 percent of ESOPs is a buyback by the company.

The lack of any clarity from Flipkart has left some former employees skeptical. “There’s no guarantee of the rest of the 70 percent. All the permutations and combinations are theoretical in nature,” a former Flipkart employee said.

“There will be no obligation for Walmart or investors to buy the options of the employees. You can continue to remain a private, unlisted company forever. If you are an existing employee right now, you have won. What will happen to the rest of the 70 percent of the vested options of the former employees, nobody knows,” he added.

A section of the employees remains hopeful Flipkart will provide clarity once the deal completes.

“It would have been nice to know the timeline but my view is that even they (promoters) would not know right now. The deal itself is to be worked out. So in the coming 90 days, a bit more clarity will emerge,” he said.

The e-commerce sector has a fair share of stories surrounding ESOPs.

Let’s take the example of Jabong’s acquisition by Flipkart-owned Myntra.

According to a source, not all Jabong employees who had ESOPs could liquidate them. But as a goodwill gesture, the company offered to buy back all their options for a stipulated price. The leadership level had an option for accelerated vesting, while junior employees were paid a one-time amount to let go of their options.

“A few leadership employees had it in their contract that if an acquisition happens 100 percent of their ESOPs would get vested. Around 4-5 of them were benefited by that clause,” said the source adding, the rest got a one-time payment ranging from four to six months of their salaries.

Another case was of Snapdeal which  saw a steep decline in valuation. Moneycontrol last reported that Flipkart had offered USD 5.5 billion for Snapdeal’s acquisition, which got rejected.

Around 2,500-3,000 current and former employees held around 5-6 percent stake in Snapdeal in ESOPs till about a year ago. The erosion in value would have caused them a loss.

Another concern, as per a former Snapdeal employee, was that anyone wanting to exit the firm and sell or transfer his options had to take approval of the promoters and the investors. “It was a tricky affair especially when the burden of getting buyers came on your shoulders and thereafter you also had to wait for the approval of the founders,” he said.

Flipkart’s headcount stands at about 10,000 employees.

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